How To Start Saving for Retirement

It’s a new year, and with it many people are setting new goals for themselves. Weight loss, rekindling old friendships, getting their finances in order. On that point, there are lots of different goals. One of the biggest is saving money for retirement.

But depending on your stage of life, retirement age can seem like a long way off — and therefore not all that important to start financially planning for. You might be thinking you can rely on Social Security benefits for your golden years — which could be a risky approach.

Not everyone knows how to start saving for their retirement. It’s a big, possibly far-off goal, and you might need some motivation to start working toward it. If that’s your situation, here’s some information that might help you out.

Benefits of Saving Money for Retirement

This might seem like a no-brainer, but you might be surprised how many people put off saving for retirement. There are lots of reasons someone might choose to wait on retirement planning. But by neglecting to save for retirement during their years of highest earning potential, they miss out on some significant benefits available to those who start early on a long-term retirement savings strategy.

First, just the peace of mind knowing that you’re doing what you can to invest in your best potential financial future can be a huge benefit. Stress around finances is no joke — it’s a perennial problem, but it’s arguably only grown since the start of the pandemic.

Financial anxiety can lead to problems in other areas of your life, too, like your relationships and your health. Getting your finances in order, and knowing that you’re going to be in good shape in the future, can lift a heavy load from you and your family.

Second, if you set and follow a long-term retirement savings strategy, you will benefit from being able to regularly set aside a smaller amount of money and have it build up over time. Saving $100 every month (or even every week) for 40 years is going to be a lot more palatable than having to build up a nest egg in a short time span.

The third point builds on the second. When you save money for retirement over a long time horizon, you not only have the benefit of being able to save a smaller amount for a comparable impact. You get to reap the benefits of compound interest — your best friend in saving for retirement.

If you save $100 every week for 40 years, you will end up with $208,000. If you invest that same amount and earn an average 7% annual return on it, you’ll wind up with over $1 million.

But different stages of life have different demands on your finances. What does saving for retirement look like at for people in different age groups?

Saving for Retirement in Your 20s

When you’re in your 20s, retirement is probably one of the last things you’re thinking about. You’re having a good time in college, possibly with a whole different set of financial concerns on your mind. Or you might be in the early stages of your career, building up your experience without a lot in your bank account yet.

In your 20s, when you might not have a lot of disposable income you can put toward your retirement savings, focus on building strong financial habits. Borrowing money might be tempting, but try to keep your borrowing modest. In college, do what you can to reduce your student loans, because otherwise you’ll be paying those off for longer than you might otherwise have had to.

Saving is one of the best financial habits to build in your 20s. It doesn’t matter if you don’t have a lot of disposable income — if you can get in the habit of setting aside even $5 a week, establishing that routine and expectation will serve you well when you start earning a higher annual salary. And because you’re so young, even small amounts of money can add up to a significant amount by the time you retire.

Saving for Retirement at 30

In your 30s, you’re likely better established in your career field. With that can come greater financial stability as your earning potential goes up. However, you may also be finding yourself with more significant expenses than you had in your 20s.

Mortgage payments, child care expenses, auto loans and even student loans might feel like they are taking up all of your financial attention. Retirement still feels like a lifetime away — it’s hard to prioritize saving for something that’s 30+ years away when you have so many pressing financial concerns.

Being consistent is the key factor. Take advantage of any opportunity available to you, like a 401(k) through your employer. Most of the time, you can set up an automatic deduction from your paycheck so you don’t have to actively manage it.

Using that type of system benefits you because you don’t see the money leaving your bank account every month, and because it’s a regular, consistent deduction it’s easy to figure into your budget. If you are eligible for an employer 401(k) match, take full advantage of that free money.

Saving for Retirement at 40

By age 40, you may have entered into your peak earning years or will get there soon. If you haven’t prioritized your retirement savings yet, you’re going to be playing catch up at this point, but with some wise (and possibly tough) decisions, you may be able to make up for lost time.

The problem for many in their 40s is that, just like in their 30s, there are significant expenses to balance with saving for retirement. You’re likely to still be paying off your mortgage, and if you have children, saving or helping pay for their college education may be front and center in your financial picture.

Do whatever you can to put money away for retirement now; one of the primary strategies is still going to be your 401(k). Try to max it out each year — in your 40s, that’s an annual contribution of $19,500, whether you’re funding it yourself or an employer match is helping you reach that number.

If you aren’t able to max out your contributions, strive to increase them as much as you can. Even a 1% or 2% increase will give a big benefit since you still have a couple of decades to let compound interest amplify your savings.

In addition to your employer-sponsored 401(k) plan, consider an additional savings vehicle, such as a traditional IRA or a Roth IRA. As with a 401(k), there are annual limits to how much you can contribute to this type of account, but one benefit to IRAs is that your contributions are after tax, which means you won’t pay income taxes when you withdraw funds from an IRA as you would with a 401(k).

Saving for Retirement at 50

Hopefully by the time you’re in your 50s you’ve been strategically saving for your retirement for decades. If you’ve been funding 401(k) and IRA accounts, you might be well positioned to hit your retirement savings goals.

If you’re still behind, you have some opportunities available to you in your 50s to help catch up. 401(k) and IRA contributions are capped annually, but once you hit age 50, your limit goes up. Instead of $19,500 and $6,000, respectively, you can now put $26,000 and $7,000 into those retirement accounts each year.

You won’t have as long of a runway to maximize compound interest, but you can be better positioned to take advantage of it with a larger sum of money being invested. And if your mortgage is paid off (or close to it), consider taking that monthly expense and putting it into your retirement portfolio — whether that’s through your 401(k), IRA or another savings or investment vehicle.

This is also a good time of life to think about limiting other expenses, particularly medical. Fidelity estimates that in 2021, the average 65-year-old retired couple should anticipate roughly $300,000 in health care expenses over the course of their retirement.

To protect your retirement savings from those expenses, consider funding an HSA to pay for medical care, or explore insurance products, like long-term care insurance, to cover the costs of extended medical care. You may not be thinking about assisted living or nursing home care in your 50s, but the longer you wait to buy a policy, the more expensive the premium payments will be.

Life Insurance for Retirement Savings

Life insurance may not be what comes to mind when you think of retirement savings vehicles, but it plays an important role. One of the key factors to consider is how your retirement savings strategy will be impacted by the loss of your spouse (or vice versa). If your spouse dies, especially if you have children, that loss will have a financial impact in addition to the emotional toll.

Whether you’re a dual-income family or one spouse is the breadwinner while the other stays home with the kids, the death benefit from a life insurance policy can help cover major expenses, like child care, education or your mortgage, without needing to borrow against your retirement savings (or prevent you from continuing your contributions).

You can explore permanent life insurance or term life insurance policies, but I recommend talking to a financial advisor to see what type of policy will be best for your situation.

You might be on the other end of the spectrum, asking “Am I saving too much for retirement?” If that’s the scenario you find yourself in, here’s a suggestion. Make a plan (again, a financial advisor can help here) and do your best to stick to it, but don’t exclusively fund your future at the expense of your present. Balance the two, follow your strategy and know that you’re taking care of yourself — both now and years down the road.

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